By Tim Ridley

This is the third and final of a three-part series on “Currency Reserves and Gold” by attorney and former Cayman Islands Monetary Authority (CIMA) Chairman Tim Ridley.

I will give it one last shot to the best of my ability, although there are indeed very much more pressing issues for the Cayman Islands than a somewhat arcane debate over gold:

1. On the subject of the MBS securities held within the CIMA portfolio, I will simply say that these were not the toxic type and, as far as I am aware, did not default or lose value. They were sold as a matter of prudence, given the financial climate at the time;
   
2. There is presently no currency risk for the CI dollar, CIMA or the Cayman Islands Government. We operate under a strict traditional currency board structure. Under the Monetary Authority Law (MA Law) all that a holder of CI dollars can claim on redemption is US1.20 for every CI$1.00. That liability is more than matched by the (unhedged) US dollar-denominated securities that CIMA holds in the currency reserves. Any currency risk rests with the holder of the CI dollars in exactly the same way as if he/she held US dollars. So if the US dollar/CI dollar depreciates against the yen, euro or renminbi (yuan), it is the holder’s risk, not the risk of CIMA or the Cayman Islands Government (as far as the currency is concerned). If the holder of the CI dollar is worried about that risk, then it is up to them to hedge the risk (which they can certainly do, indeed possibly by holding gold, as Mr. Guelo recommends). There is no compelling reason for CIMA or the Cayman Islands Government to do so;
   
3. The current position also reduces the risk of any pressure in the forex markets on the CI dollar and pretty well eliminates any disruption by traders speculating for or against the CI dollar (they can do that against the US dollar as much as they like);
   
4. Given the above analysis, it does not much matter for Cayman if the US$ ceases to be the world’s reserve currency while the US is our main trading partner and our revenue and expenditures (private and public sector) are US dollar-denominated.
   
   If it becomes apparent that our trading patterns and trading currencies are changing, then it may be appropriate to reconsider. At that point, if we change the peg or go to a floating exchange rate, time enough to consider changing the structure and make up of the reserves.
   
5. I reiterate that Mr Guelo’s case for gold is actually one of missing the potential opportunity to make a profit, not one for hedging. And commensurately with his case goes the risk of making a loss, if gold retreats. Under the MA Law and usual practice, CIMA distributes to Government its net surplus annually, after meeting its statutory requirements with respect to the currency reserve and its general reserve. 
   
   Were CIMA to have invested in gold, fortuitously got its timing right and generated a profit/gain (even an unrealized one), it would be required to pay the net annual profits/gains to our Government each year and/or to use it for its own operating expenses (so the currency reserves would not increase). 
   
   Were CIMA to get its timing wrong, and gold were to go down in value (even if no loss was realized), breaching the statutory requirement that the CI dollar is 100% backed by the reserves, the Government is required under the MA law to make up the deficit to bring the reserves back to 100%. That could be very painful indeed.
   
6. So I respectfully submit that relying on the right timing to make a profit (or avoiding a loss) on gold is not what the currency reserves are all about. We are not China or Switzerland and our currency arrangements and reserves are very different. I would need a lot more persuading that the risk of loss of capital (and the carrying costs and loss of income generation) could be prudently and cost effectively hedged and that the value of the other risk free assets in the reserves were equal to the outstanding currency liability before going down this road.

Timothy “Tim” Ridley is a graduate of Cambridge University (BA) and Harvard Law School (LLM) and qualified as a solicitor in England. He has practised as a Cayman Islands attorney-at-law for over 30 years and is the former Chairman of the Cayman Islands Monetary Authority. He was made an Officer of the Order of the British Empire (OBE) in 1996 for services to the financial industry and the local community.